How a Traditional IRA Works

Millions of Americans work hard to ensure that they and their families are financially taken care of. While immediate needs are important, the reality is that future financial needs must be handled alongside immediate needs. For this reason, people take a portion of their pay and place it into traditional IRAs. Although hundreds of thousands of Americans have traditional IRAs, not everyone understands how they work.

What Is a Traditional IRA?

Traditional IRAs are a reliable form of retirement, but understanding how they function is vital to financial planning. Traditional IRA’s are retirement funds that are tax deductible when contributions are made. Therefore, investing for retirement is one way to receive significant tax breaks, but the government will come back for that money at a later date.

Let’s say someone invests $1,000 into a traditional IRA. This $1,000 would add to their tax breaks for the year that they invested. Once the money is invested, people typically choose investment plans that match their age till retirement. Younger people are encouraged to invest in riskier bids to make money faster; older people are encouraged to invest in safe proposals to keep their money safe. Essentially, the amount of risk someone should take when investing scales down the older someone gets. Once the investor reaches retirement age, they are now able to withdraw money from their account, but it comes at a price.

What Goes Around Comes Around

Remember how the investor received all those tax breaks when they contributed money to a traditional IRA? Well, the government remembers, and they are sure to remind people of their payments. When someone begins to withdraw money from a traditional IRA, the government requests that the person gets taxed on those withdrawals. This means the initial investment amount (the $1,000 mentioned above) and any earnings the $1,000 makes while in the traditional IRA is taxed by the government. Now you understand why putting money in a traditional IRA is tax-deductible, because the government wants your initial investment as large as possible to receive a bigger payday when a person withdraws money. Although the government makes money on your investment, so do you, so it is a fair trade!

If you are interested in applying for a traditional IRA or another retirement fund, contact us now! At American Investment Planners, our goal is to help people save money today for a brighter future tomorrow!